CHAPTER No.

1
Introduction to Logistics & Distribution System
INTRODUCTION
Warehousing and Distribution Network is one of the premier functions of Logistics Systems.
However, it tends to be ignored in a company’s supply chain. In SCOR [1] model of Plan,
Source, Make and Deliver, warehousing is implicit in sourcing and delivering. Still then, 88
percent of Asia-Pacific Companies outsource at least some of their warehousing functions and
logistics functions to third party, a clear indication that they do not consider warehouse
management and logistics management to be one of their core competencies.
Conversely, the biggest company in the world-retail giant Wal-Mart Stores-built its discount
empire largely on efficiency of its Distribution Network.
1.1. Logistics System:
Logistic system means effective transportation of products from source to the factories to the
customer in most efficient way and minimum cost with excellent customer services.

Logistic system = Sourcing System + Material Handling System + Distribution System

Supply System: Supply system is composed of means for flow of raw materials from sources to
the point of manufacturing and subsequently storing them at the designated places.

Some popular Definitions of Logistics System are given below;

Logistics management is the integral component of supply chain that plans, executes, and
controls effective and efficient flow of goods in reverse and forward directions, stores goods,
provide information related to services between the point of production and the point of
consumption in order to meet customers' requirements.

(CSCMP’s Definition of Logistics Management-2011)

Logistics is the transfer of right resources at the right time at the right place at the right cost in
right quality.
(Chartered Institute of Logistics and Transport (UK), 2005)

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The figure given below is explaining the transfer of materials and information between different
echelons in forward as well as in reverse directions of supply chain;

Fig. 1.1: Configuration of logistics system of a company operating in FMCG category,

illustrating functions, directions of flow of information as well as of material in supply
chain.

1.2. The Evaluation of Logistics System:

The function of logistics management and distribution network management were already in
practice along with the concept of manufacturing, production and warehousing of finished or raw
goods. However, as the business, social, cultural and economic conditions have evolved rapidly
in last few decades the concept of logistics and distribution has been evolved as full fledged
functions.

Now, logistics play a very vital role for achieving competitive advantage over the competitors, as
companies has started to customized the structure and strategy of their logistics network based
upon their requirements. The basic ideology and methodologies remains the same for building
the modern concepts and theories of logistics management.

Mr. Alan Rushton, Phil Croucher and Peter Baker have been working on the summarizing the
theories, basic concepts, histories, methodologies of logistics network and presented them in the
form of a book. In their book, “The Handbook of Logistics and Distribution Management”, [2]

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the evolution and development of logistics management and distribution network system has
been summarized in the following eras;

1.2.1. The Earliest Era of 1950 ~ 1960: In this tenure, there were no specific models of
distribution network of any organization. Activities were executed as they were
encountered. There were no synergy between Manufacturers, Distributors, and
retailers.
1.2.2. The Era of 1961 ~ 1970: The efforts were put into practice to link the material’s
supply with demand, manufacturing with distribution network and so the benefits
obtained from such interconnection were realized at the end of this decade.
1.2.3. 1971 ~ 1979: The decade of 1970 observed significant development in the re-
structuring, or organizing and optimizing distribution network system. The
control and management of Distribution network system were included in the
functional level of management in the hierarchy of the organization. Giant
retailers developed business relationships with the manufacturers and achieved
significant reduction in cost and chances of being out of shelf.
1.2.4. After 1980s: After realizing the benefits of inter-organizational relationships,
companies started to developed optimized distribution network by experimenting
different configurations of networks. In this way the concept of centralized
distribution strategy, de centralized distribution network and integrated
distribution network were formulated. Attentions were given to optimize the
inventory present at each distribution channel. As use of computer was
expanding, companies started to use it for increasing the communication and
information exchange between partners. The concept of outsourcing the
warehousing and logistics system was also practiced.
1.2.5. Early 1990: As computer technology was becoming common after the invent of
personal computers, the use of Information technology was expanding as well.
Therefore, companies used information technology for effective and efficient
material management and connecting it with inbound and outbound distribution
network so achieve competitive edge.
1.2.6. Late 1990s: After realizing the significance and attaining the benefits of inter-
interdepartmental relationships, companies started to integrate its operations with
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 independent business partners. Therefore, the concept of supply chain was
highlighted.
1.2.7. The 20th Century: As the concept of globalization was introduced and companies
started to take benefits of the globalization, the significance of distribution
network became more evident. In the changing economic and social conditions of
overall world, the concept of supply chain disruption is very evident; the supply
chain disruption can be avoided by making your supply chain more agile.
1.3. Importance of Logistics System Management in Pakistan:
Studies have revealed that in the year of 2006, the transportation sector contributes 10.5 percent
in our Gross Domestic Product of our beloved country and 27.4 percent in the Gross Fixed
Capital Formation. Nearly 6 percent of the employment of Pakistani national is associated with
this sector, and it receives nearly 16 percent of funding from federal sector development
program’s funding. Most of the contribution in this sector is of Pakistani government. [3]
1.4. Integrated Logistics System:
Integrated logistics mean that Logistics functions in coordination with other departments. There
are following techniques or tools for integrated logistics;
1.4.1. Distribution Requirement Planning: Distribution Network Planning includes
utilization of Manufacturing Resource Planning, efficient inventory control
system, material control system connected with warehousing and transportation
scheduling system.
1.4.2. Just In Time: Just In time is Japanese management philosophy that says, waste
can be eliminated by sourcing the right goods, producing the right goods in right
quantity, distributing the right goods at right time at right place.
1.5. Competitive advantage through Logistics:
Recently it has been recognized that Logistics and Distribution costs can be very vital in the
winning the competitive advantage over competitors or capturing the market share by providing
services through customized logistics and distribution system.

Some of companies gains competitive advantage through cost leadership and some of companies
gains competitive advantage through service leadership. Distribution and Logistics system can
make a company cost leader or service leader.
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The Logistics and Distribution Network configuration for cost Leadership differs from the
configuration for service leadership. Therefore, each company within the same industry should
design their distribution network in accordance with the business Strategy/ Philosophy. The
logistics implications for different competitive positions are given below;

1.Service Leadership: 1.Cost Leadership:

2. Tailored service 2. Capacity Utilization

3. Tailored Distribution Strategy 3. Asset turn

4. Reliability 4. Low inventory

1.6. Components of Logistics System:

There are following major components of the logistics system;
 Transportation
 Warehousing
 Inventory
 Information
1.7. Distribution System:
Distribution Network system is defined as “Processes and means by which a bunch of products
are physically moved from the point of manufacturing to the end customer”.

Distribution network is composed of Distributions Channels/ First Marketing Warehouses.

1.8. Distribution Network Anatomy:
1.8.1. Supply Points: Supply points could be manufacturing facilities, Intermediate
DCs or warehouse, raw material suppliers, retail stores or pick up points.
1.8.2. Demand Points: Demand Points could be end customers, retail stores, and pick
up locations or even manufacturers and DC/warehouses.
1.8.3. Transshipment Points/ Intermediate Points: These are the warehouses or cross
docking points for moving goods from plants to customers.
1.9. Structures of Distribution Network:

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 1.9.1. Two stage Distribution Network- Direct Delivery: There is only one Supply
Point and demand Point in this type of Distribution Network.
1.9.2. Three Stage Distribution Network: Other than supply and demand point there
is a intermediate point in the distribution network. Typically there are three types
of intermediate facility: Consolidation, Break Bulk, and Cross docking facility.
1.9.3. Multistage Distribution Network: There is more than one transshipment
facility along entire distribution network.

Fig 1.2: Alternative distribution channels for consumer products to retail outlets
1.10. Distribution Channel:
Distribution centers or commonly known as Warehouses are the facilities or locations where
groups of products arrive in bulk from single or multiple places and then they are distributed to
single or multiple locations.

1.11. Functions of Distribution Channel in Distribution Network:

1.11.1. To minimize logistics and total costs.
1.11.2. To increase the sales.
1.11.3. To make available the right product at the right market for right customers.
1.11.4. To Protect against uncertainty of demand.
1.11.5. To provide some value adding activities like postponement, Accumulation,
Sorting, Allocation, and Assembly at the distribution centre.
1.11.6. Supporting Economy of Scale in Production.
1.11.7. Promoting transportation economies.
1.12. Green Distribution Network:
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During last two decades, it has been very clear that environment is not a free commodity.
Industries have started the realization of environmental issues and had started serious efforts to
develop Green Products and Green processes to develop those green products.

There are many areas in the production system and distribution system that has drastic effect on
the greenhouse emissions.

It is believed that in the near future, the news means of transportation will be developed with the
goal to reduce the energy costs and environmental impacts. Innovative hardware transportation
means are in the process of research and development. e.g; in RO-RO shipment. Research should
be extended in areas like International Container Management, Management of pallets and
techniques for route planning for circulatory type of transportation, so that significant cost can be
reduced in this type of the logistics.

While making the distribution network such that it aligns with the business strategy and become
the competitive edge in the success of the organization, efforts need to done in such a way that
social, cultural and environmental factors are considered in design of optimal distribution
network.

Fig. 1.3: Annual Green House Gas Emission by Sector [8]

1.12.1. Effect of Distribution Network on Environmental Issues
Industry energy consumption per unit of GDP of Pakistan is much higher than many other
developing and developed countries. A study revealed that in the year of 2003, about six giga
tons of carbon dioxide was produced alone by the transportation sector of Pakistan, while ten
giga ton of carbon di-oxide was produced by the electricity in the world.

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Among the transportation means for logistics purposes, transportation by road dominates rest of
the means according to usage and it constitutes about 73 percent, while air means of
transportation comes at the second number for transportation of goods, its share is about eleven
percent. Transportation by water is also an integral mean for transportation of large number of
shipments, its portion of contribution is only nine percent while only three percent of goods are
transferred by mean of railway.

However, share of emission from road means of transport is the highest among the other share of
emissions from all other transportation modes. This share accounts about eighty percent in the
emissions.
The emission of greenhouses from different kind of transportation modes depends upon number
of factors. Here are those factors:
 Transport task i.e moving people or good.
 Mix of transportation modes being used for accomplishing task.
 The type and quality of fuel used by transportation mode.
 The emissions characteristics fuel being used in vehicle.
The issues involved in the development of improved technologies in order to reduce emission of
green house gases are;
 The type of drive train being used.
 The type and quality of fuel being used by vehicle.
This table tells the quantity of carbon di-oxide emitted per metric ton and per kilo-meter of
transportation;

Table: 1.1: Carbon di-oxide emitted from different transportation modes in grams
Therefore, it is evident that when you avoid using Air transportation as mean for transportation
goods, actually you are helping to reduce the CO2 emissions!

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 Fig. 1.4 CO2 emissions by means of transportation (g/ton-km)

1.13. Transportation in Pakistan:

Transportation sector plays a very vital role in the economy of the country; it has a share of about
ten percent in the gross domestic product of the country. Employment of large number of people
is associated with this sector; nearly six percent of employment is associated with this sector.

The road infrastructure of Pakistan is much better then that of India, Bangladesh and Indonesia,
however, the condition of railway system in Pakistan is worse as compared to India. There is
need to do a lot of improvement in air transportation, by effectively utilizing the existing
infrastructure and modern management techniques.

Table 1.2 Quality of infrastructure

1.13.1. Different Transportation Modes in Pakistan:
 Road and Trucking:
After 1996, the length of road is increase by thirteen percent, which constitutes nearly 2
lacs and 59 thousands kilometers, out of which majority of the length is of high type.
The share of national highways and motorways constitutes 4.2 percent of the total road
network and handle more then 85% of Pakistan’s total traffic. [4].
 Trucking Services:

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 According to the report of Government of Pakistan in 2010, Transportation system of
Pakistan is majorly depended upon the trucking industry which constitutes nearly ninety
six percent of the total freight traffic. There are nearly 216,043 registered trucks while
196,850 trucks are on the road. Out of these trucks, nearly 70 percent of the trucks are of
single or double axle trucks mostly owned by small truck operators. Largest truck
operator in the country is National Logistics Cell whose market share is only 10%. In
order to increase the efficiency of transportation operators are willing to purchase multi
axle trucks however they face difficulty in purchasing multi axle trucks due to high taxes
and low freight rates in domestic market.

Fig1.5: Percentage Share of road transport in freight Activity in Selected Asian Countries
 Railways:
The best medium for transportation of large scale of goods and passengers is Railways.
Railway had been the primary mode of transportation for Pakistan since seventies.
However, since the focus of government of Pakistan has been shifted from railway to
road, the conditions of the railway had been drastically decreased. There is significant
difference between the budget for railway and roads. According to Govt. of Pakistan, in
2010 only 45 billion rupees were allocated for railways while 155 billion rupees were
allocated for national highways. Now, railway’s share for inland transportation has been
decreased from 41 percent to only ten percent in passenger category while from 73
percent to only four percent for transportation of Goods.

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 Airways:
According to the statistics of Civil Aviation authorities of Pakistan, In the year of 2007-
2008, there are about thirty five airports allover the Pakistan which handles more then
fourteen million passengers and nearly b billion ton of cargo in a year. Biggest and
busiest airport of Pakistan is located at Karachi and is named as Jinnah International
Airport. Two other major airports of Pakistan are located at Lahore and Islamabad, which
handles both domestic and international flights as well. Pakistan International Airline has
the highest market share in terms of passenger’s traffic which accounts to 73 percent and
captures nearly all the freight forwarding business through airline. Pakistani airports are
directly connected with UK and Middle East countries. There are also infrequent flights
to USA from Lahore airport only in a week. Average time for a direct flight to USA is
eighteen hours while connecting flights takes normally more then 24 hours. The direct
flights to other countries like Germany, China, Europe and are also very infrequent and
once in a week mostly. The cost per Km for air travelling is also expensive in Pakistan.

1.13.2. Environmental and Social Impacts of Freight Transport:

1.13.2.1. Fuel Consumption:

It has been estimated that, by the end of year 2050, the consumption of fuel will reach to
the level of twelve hundred billions of liters by the heaver trucks in all over the world
which will be 138% increase then of the year 2000. In Asia, the market share of trucks
freight will increase from 19% to 34% till 2050.

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 Fig. 1.6: Road Freight Energy Use and % Consumption by Asian Countries

Source: WBCSD and IEA (2004)

Table 1.2: Percentage of Diesel in the Transport Fuel Mix in Selected Asian Countries

Source: Data taken from IEA’s Energy Balances of Non-OECD Countries as quoted by
Timilsina and Shrestha (2009)

1.13.1.1. CO2 emitted in Pakistan by Different Transportation Modes:

The transportation section has always remained a topic for environmentalist as it is one of the
highest sectors that contribute to the degradation of the environment. Nearly transportation sector
contributes 70% in the contamination of the environment. Such remarks have been passed by Mr.
Gulzar Feroze, chairman of Federation of Pakistan Chambers of Commerce and Industry
(FPCCI) in a meeting with environmentalist.

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Source: Dawn News

Major source of GHG emissions in allover the

world is transportation sector. However, the
condition in South Asia is relatively better then
other sources. There are large variations in the
amount of green House emission gasses in the
South Asian countries. Pakistan and Srilanka have
been graded as highest carbon Di-oxide producers
among the South Asian countries.

Table 1.4: Growth Rate of Co2 emission

1.13.2. Impact of Change of

Transportation Mode on GHG emissions in Distribution Network :
Green house gas emissions from a distribution network taking freight truck as transportation
mode is given below;

Table 1.5: GHE from Jhelum Factory to FMW with trucks as transport mode

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 Table 1.6: GHE from AK Factory to FMW with trucks as transport mode

Table 1.7: GHE from Jhelum Factory to FMW with train as transport mode

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Table 1.8: GHE from Jhelum Factory to FMW with train as transport mode

CHAPTER No. 2
15
Literature Review about Strategic Distribution Network Design

INTRODUCTION
Logistics system and Distribution Network Management have become very integral components
of any supply chain. In the distribution network system, the strategic level of decisions involved
are deciding the number of distribution Channels, deciding the transshipment schedule,
transshipment cycle time, appropriate level of inventory at each place, while keeping the
transportation cost, warehousing cost and inventory holding cost at minimum level. Calculating
these factors while balancing against cost is the key for minimizing the distribution Network
cost.

Conversely, the biggest company in the world-retail giant Wal-Mart Stores-built its discount
empire largely on efficiency of its Distribution Network.
2.1. Literature Review on Strategic Design of Distribution System
The research work done in the field of design and development of the distribution network
has been very extensive. Researchers have developed my techniques for designing the
distribution network. These techniques vary from Cost benefit analysis to complex
mathematical models. In this section of the report, we are going to present the crisp of the
other’s work in relationship to ours.

2.1.1. Cost benefit analysis based approach for design of Distribution Network
A passionate worker on supply chain presented his book on designing of the distribution
network in the supply chain, in which he described different configurations of Distribution
Network for different variety of customer’s requirements and characteristics of products.

This paper highlighted factors influencing decision of configuration of distribution

channels and at last presented a cost based model for determining number of distribution
channels required for the optimum operation of company.
In 1985, Donald B. Rosenfielfd [5] from the M.I.T Sloan School of Management presented
his work on “Design and control of Multi Echelon Distribution System”. In this paper they
presented a cost based analysis for the design of multi-echelon Distribution Network. In
this paper various factors have been identified in the design of Distribution Network, i.e
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sensitivity of cost w.r.t different configurations of Distribution Network, Later on size of
the warehouses were also estimated keeping in mind the requisite inventory levels.

2.1.2. Design of Distribution Network based on Mathematical Programming:

The alternative to the Cost benefit analysis is the mathematical modeled distribution
network. These mathematical models begin to emerge in 1970s with limited computational
capabilities.

The alternative to the Cost benefit analysis is the mathematical modeling of distribution
network. These mathematical models began to emerge in 1970s with limited computational
capabilities.

In 1976, two distinguished researchers, Geoffrion and Graves [6] presented mathematical
model based on mixed integer Linear Programming for distribution network design. It was
one of the earliest works based on mathematical programming on distribution network.
This model was formulated for transporting multiple products over a single period for
determining the locations of distribution channels between plants located at different
locations and customer spread allover locality. This model was implemented on a Major
Food company and was solved by benders decomposition technique.

Another supply chain enthusiast, C.H Aikens [7], analyzed mathematical models on facility
location presented by different researchers. These facility location models included
supply/demand constraints, model were formulated for multiple echelons and single
echelon. It was recommended at the end of the study that is is very integral to formulate
mathematical model for multi stage and multi-products.

With the developments of complex systems and technologies and as the world has evolved
into globalization, Verter and Dincer [8], reviewed structures of global supply chain
models and analyzed the working of global distribution networks.

In 1995, the developments made in the designing, optimization and implementation of

distribution networks over the last twenty years were reviewed by the Geoffrion and
Powers [9]. It was described that development of various algorithms, advancement in
information technology has contributed a lot in the development of distribution network.
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Vidal and Goetschalckx [10] reviewed different formulations of distribution networks and
the solution approaches for optimizing these formulations. Computational results from
these formulations were compared. A few researchers also considered customer service in
their model as well.

Wesolowsky and Truscott [11] formulated mathematical model for restructuring, relocation
of facilities for multi-period transshipments. The modeled he developed for multiple plants
located at different locations and scattered customers.

The model for calculating the size of production and distribution batches simultaneously
such that the total cost is minimized was developed by William [12] using dynamic
programming for multi echelon system. The model is applicable for all the time.

The mathematical model developed by Ishii [13] used to determine the base stock levels
and lead times such that the overall cost of a coordinated supply chain is minimized for a
limited time period.

Tsiakis, Shah and Pantelides [14] formulated a program based on mathematical equations
for determining the number, deciding the location and capacity of each distribution channel
in a multi echelon distribution network, while keeping the total distribution network cost at
minimum level.

Operational and strategic issues like site selection, equipment selection and batches for
manufacturing and distribution of multi-products were simultaneously decided by a
mathematical model developed by Brown et al [15]. This was first of its kind model
involving both strategic level and operational level issues in one model.

Pooley [16] formulated a mathematical model for distribution network whose objective
function was to minimize the total distribution network cost while determining the location
and number of plants and distribution channels for a Fast Food company. This model deals
with the transshipment schedule to serve the customers. This model was based on Mixed
integer linear programming.

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As the world was started to enter into arena of globalization, Arntzen et al [17] formulated
a mathematical model for global supply chain for determining the optimal location and
number of distribution channels with the objective to minimize the overall distribution
network cost and number of operating days to serve the customer on time and in full.

The pressure of reducing the transportation cost, launch of new products with short life
cycle, forced Practor and Gamble to reconfigure their distribution network based on
mathematical model for determine the number of warehouses to operate effectively In
specific customer zones. It as modeled as Transportation model using Mixed integer linear
programming and was developed by Camm et al. [18].

Mixed integer linear programming was used for developing a mathematical model. The
decision variable for the model were deciding the location of factories and determining the
number of first marketing warehouses with the objective function to minimize the total
distribution network cost which includes fixed cost of building a warehouse and variable
costs associated with warehouses. The model obtained feasible solutions using lagrangian
relaxation algorithm. This model was actually implemented for a health care manufacturing
company. The work was presented by Pirkul and Jayaraman [19].

After detailed analysis of interdependence between site location, inventory control and
management and transportation, Jayaraman [20] designed an integrated model including
these three decisions to minimize distribution network costs. The model gives better
understanding of the trade-offs among the three components.

A mathematical model was developed for developing a methodology for determining the
location of capacitated manufacturing facilities using mixed integer linear programming.
The decision variables in this model were selection of manufacturing facilities and the
schedule of transshipment to customers. This model was formulated and presented by
Hindi and Pienkosz [21].

Current et al. [22] reviewed, analyzed and summarized the research work done in the
network design and optimization of distribution network. Then he developed a
mathematical model having four objective functions i.e 1) minimize the distribution
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network cost, 2) fullfill the customer’s demand 3) Maximize the profit 4) minimize the
environmental risks. The decision variables included in this model were determining the
number of manufacturing facilities with the constraints on their capacity of production.

The solution on similar problem that is strategic design and optimization of distribution
network was presented by researchers Owen and Daskin [23] and Sridharan [24].

Guy-Aimé et al. [25] developed a mathematical model using mixed integer linear
programming for determining the location and number of distribution network. The
langrangian relaxation approach was used to develop the model. This model also
considered inventory management at each distribution centre using economic order
quantity formula. The objective function was to minimize the inventory levels, reduce
logistics cost while meeting the customer’s requirement on time in full.

A mathematical model for deciding the location of facilities was formulated by Klose and
Drexel [26]. They reviewed complexities, multiple solution methods and their results. The
focus area of their research was continuous location models using mixed integer linear
programming.

Tabu search [27] methods were formulated to solve the facility location problem, this
model was developed for small and medium sized industries.

A variable neighborhood search algorithm was presented in [28] to solve the Fixed Charge
Facility Location problem and the P- median problem.

The studies on facility location models ([29], [30], [31] and [32]) usually uses over
simplified deterministic facility location models that do not cater essential operational costs
such as inventory holding costs.

As the customer behavior changes, short product life cycles and changing external
environment, Snyder [33] developed a stochastic model inculcating these
phenomena and tried to maximize the profit by reducing the cost.
Barahona and Jensen [34] developed a mathematical model for un-capacitated facility
location decision while considering inventory levels as well in their model.
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Ali Amiri [35] involves decision regarding location of plants, warehouses and formulation
of strategy for distributing goods from plant to Distribution center and then to customer
while total cost of distribution is minimized. This model includes multiple levels of
capacities available to the warehouses and plants.

Tragantalerngsak et al. [36] developed a model for multi-echelon supply chain, in the first
stage of the supply chain, manufacturing facilities were un-capacitated and facilities in the
second stage were capacited. The objective function of the model was to determine the
distribution network cost while fulfilling the customer’s demand.

Jia Shu, Jie Sun [37] developed a model in which he took demand as uncertain for
designing the distribution network for minimizing the totals warehousing cost,
transportation cost and inventory holding cost. He formulated nonlinear stochastic model
for two stage distribution network.

H. Edwin Romeijn et. al [38] presented a model for deciding the operating cost of
distribution network, transportation cost, warehousing cost, out of shelf cost for a un-
capacitated distribution network. This model presented a generic model that can be
implemented on any industry.

Hadi Mohammadi et al [39] formulated a integrated model of suppliers, plants, warehouses

and transshipment schedules. This model was soled using Mixed integer linear
programming using benders decomposition.

Burns et al [40] formulated a mathematical model for modeling of supply chain system of
one supplier, multiple factories and location of customer at multiple scattered locations. He
analyzed, compared and suggested improvement areas in the two distribution strategies.
The structure of distribution network was formed on cost benefit analysis of inventory cost
and transportation cost. The shipment size was determined by economic order quantity
formula for direct shipping.

Muckstadt and Roundy [41] developed a mathematical model for distributing products
from one warehouse to multiple distributors located at different locations using nonlinear
programming.

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 Robinson et al. [42] integrated two independent distribution networks as a whole for Dow
Chemical Company. They develop an optimization based decision support tool to analyze
trade-offs among facility, inventory and distribution costs.

Syarif et al. [43] formulated a mathematical model for multi echelon distribution network
using mixed integer linear programming. The objective function was to minimize the total
distribution network cost, decision variables were to decide which warehouse to open and
which to close and how products will be distributed from plants to warehouses and from
warehouses to distributors located at different locations. For solving the model, he used
spanning tree genetic algorithm and then compared the results with other models.

Wang, Sun, and Yang [44] developed a mathematical model for distribution network in
multi-echelon supply chain. He considered inventory levels present at each distribution
centre as well as transshipment schedule along with the facility location model.

Elhedhli and Gzara [45] analyzed the distribution network of the multi-echelon supply
chain. He analyzed the current problems present in the supply chain. Then he developed a
mathematical model for reducing the total distribution network cost. He considered
location of plants warehouses, the capacity of production of plants and capacity of
warehouses. Using the developed model he calculated the optimized transshipment
schedule so that transportation cost from each warehouse to distributor can be minimized.

Rabbani et al [46] formed a model for optimizing the distribution network for multi
product supply chain system. The supply chain system was composed of production
plants, suppliers, warehouses and customers. He formulated a distribution strategy based
upon the results of the model.

2.2. Solution Techniques

2.2.1. Cost benefit Analysis
Distribution Network design can be done using tradeoff analysis. The tradeoff analysis
tries to weigh balance between different cost components like inventory holding cost,
transportation cost and warehousing cost (Fixed and variable costs). The vital cost
components of Distribution Network cost are;

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  Inventory Holding Cost: The Inventory holding cost increase, as the number of
Distribution Channels increases, this is because of increase in accumulated inventory
level.
 Transportation Cost: Transportation cost depends upon the vehicle used and the
distance between the DC and customer location. As we increase the number of
Distribution Channels/centers, the transportation cost decreases, because the
distribution centers will be located in close approximation to customers.
 Fixed and Variable Warehousing cost: Distribution Network cost increases, as the
number of facilities increases.

Fig. 2.1: Functional Trade offs

In order to calculate the approximate number of distribution Channels a company should have
using tradeoff analysis, we should draw the following graph;

Fig. 2.2 Calculating No. of Distribution centers by qualitative method

2.2.2. Mathematical Optimization Techniques
The structure of mathematical model is as follows;
 Objective Function:
 Decision Variable:
 Constraints:
 Non Negativity Constraints:
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 The solution of Mathematical model is found by using two methods;
1. Using an exact Algorithm: This algorithm finds optimal solution of problem. E.g branch
and Bound Algorithm.
2. Using Heuristic Algorithm: This algorithm finds a good solution rather than optimal
solution.

CHAPTER No. 3
Pakistan Tobacco Company
INTRODUCTION
This section of thesis contains two topics of thesis. First topic deals with the analysis of previous
history of cost data of different echelons of supply chain. This section emphasizes on the
importance and need of the project. Different data analysis and trend identification techniques
have been utilized effectively for meaningful interpretation of available data. While second topic
describes the way and methodology in which under examined problem was resolved. Therefore,
the transportation schedule was proposed based upon the findings of model.
3.1. Introduction to Pakistan Tobacco Company:
Pakistan Tobacco Company is a subsidiary of British American Tobacco Company- world
second largest tobacco producer, having it’s headquarter in Islamabad, Pakistan. Pakistan
Tobacco Company was formed in 1947, soon after the partition, when it took over the business
of Imperial Tobacco Company of India. Imperial Tobacco Company was present in the
subcontinent since 1905. Pakistan Tobacco Company was first Multinational that started its

24
operations from Pakistan. Its operations were started from a warehouse located near Karachi
Port.

Pakistan Tobacco Company is largest tax payer in the country in private sector. In the year of
2009, PTC paid nearly thirty seven billion to government of Pakistan in terms of sales and excise
taxes.

Jhelum Factory was established in 1955, AKF was established in 1975. PTC produces tobacco
in various brand forms. It has two factories operating in Pakistan having 1575 employee.

In the tobacco market, the market share of PTC is about 48.6 % and other competitors are
Lakson Tobacco Company, Mardanwalls and others. Major competitor of PTC is Lakson
Tobacco Company, part of Phillips Morris International with market share of 50.8 %.

The globally established and locally recognized brands are key strengths of PTC. Factories are
located at Jhelum and Akora Khattak. The increasing freight cost, unnecessary warehousing cost
of company were the key areas to improve. Pakistan is the fast growing market in tobacco so it’s
a great opportunity to explore new markets, reduce distribution cost and increase capacity
utilization
3.2. Current Distribution Network Of Pakistan Tobacco Company:
Manufacturing:

When tobacco is received from the suppliers, it is in raw material form, the quality of this
tobacco is checked and then it is blended with other ingredients according to the brand recipe
such as for flavoring or pre-processed tobacco.

The distinguishing between different brands of tobacco is very important and the blending with
other ingredients is the key for taste. Now this technology is increasing used in this kind of job in
order to achieve optimum level of quality and taste in the tobacco.

Moisture plays very critical role in the taste and development of ticks. If tobacco is too dry then
tobacco leaf will be crumpled, it there is too much moisture present in the tobacco, it will be
spoiled during storage. This blended tobacco is then treated with right amount of the steam and
water to make it supple, and then it is cut into the form which appears in the cigarette stick.
25
Therefore, excessive moisture is removed from the tobacco so that cut tobacco can be given a
final quality check.

As computer technology is expanding day by day, its use in the tobacco making has also
increased. The complete process of making machines is totally computerized to ensure speedy
and quality tobacco manufacturing. The quality control of every process is computerized in
order to ensure its specifications. Then automatic machines put them into the familiar brand
packs, wraps the pack in protective films and group into cases. Quality control is done at each
step to ensure taste and aesthetics.

The completed cases are time dated to ensure the freshest product possible. Now cases are ready
for Distribution.

Distribution:
The company constantly monitors and evaluates global supply chains networks to guarantee that
brands are delivered by the best distribution method.

The retail outlets include supermarkets, convenience stores, hotels, restaurants, cafes, tobacconist
and duty free shops. It’s the job of trade marketing to work with retailers, to enable adult
consumers to buy brands where they want, when they want and in sufficient quantity.

 Total Production Volume 41.183 Billion Sticks

 Total Sales of Sticks 41.183 Billion Sticks
 Factories 2
 Head office 1 (Islamabad)
 Area offices 18
 Trade Marketing Regions 4
o North Punjab & N.W.F.P.
House # 57-A /6, Satellite Town
Rawalpindi. +92 (51) 4582390-91
o Central Punjab
128/129-G, Commercial Area
Phase-1, Defence Housing Authority
Lahore.
o Southern Punjab
House No. 93, Street No. 3
26
 Meharban Colony, MDA Chowk
Multan.
o Sind & Baluchistan
8th Floor, N.I.C. Building
Abbasi Shaheed Road
Karachi.
 Number of existing Distributors 225
 First Marketing Warehouses 12
 Company’s Sponsored outbound shipment 190
 Number of Distributors who have their own outbound shipment : 35
 Location of Distribution centers:

1 Karachi 7 Faisalabad
2 Hyderabad 8 Sargodha
3 Sukkar 9 Jhelum
4 Multan 1 Islamabad
0
5 Bahawalpur 1 Quetta
1
6 Sahiwal 1 Gujranwala
2
 Leaf farmers 12,000
 Leaf Regions 5
 Wholesalers 7,000
 Local Suppliers 13
 Imported Supplier 14
3.3. Network of Pakistan Tobacco Company on the MAP of Pakistan

27
 Fig. 3.1 PTC’s Distribution Network on Pakistan’s Map
3.4. Need for Redesigning the Distribution Network:
 The demand for Tobacco is increasing steadily over the last few years.
 The enormous increase in the fuel costs.
 In order to make the Distribution Network as a competitive advantage over competitor.

CHAPTER No. 4
Data Analysis for Problem Formulation
INTRODUCTION
This section of thesis contains two topics of thesis. First topic deals with the analysis of previous
history of cost data of different echelons of supply chain. This section emphasizes on the
importance and need of the project. Different data analysis and trend identification techniques

28
have been utilized effectively for meaningful interpretation of available data. While second topic
describes the way and methodology in which under examined problem was resolved.
Therefore, the transportation schedule was proposed based upon the findings of model.
3.1. Problem Identification:
3.2. Analysis of Supply Chain Cost:
The table shown below represents the comparison between the cost occurred in different
departments. The table helps us to understand to clearly understand the
Sr. Year Marketing & Sales Cost Production Overheads Distribution Cost
1 2004 1,038,358 1,337,546 403,998
2 2005 1,119,742 1,517,036 458,914
2006 1,274,345 1,775,950 549,028
2007 1,198,765 1,932,237 579,028
2008 1,249,080 2,314,499 684,284
2009 1,503,693 2,433,653 742,321
Table 4.1: Analysis of Supply chain cost.
3.2.1. Marketing and Sales Cost
The marketing and sales costs of products have increasing trend as depicted by the graph.
This graph shows the data since 2004. [see Annexture 1, Graph 1]
3.2.2. Production Overhead Cost
The cost for production overheads is being depicted in the graph in comparison with the
marketing and sales for since 2004. The graph shows that production overhead cost has
lager contribution then the sales and marketing cost. [Annexure, Graph 2].
3.2.3. Distribution Cost
The graph in annexure [Graph 3] is depicting the comparison of distribution cost and
production volume. It shows distribution cost is increasing more rapidly as compared to
production volume.

29
 3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
Year 2004 Year 2005 Year 2006 Year 2007 Year 2008 Year 2009

Marketing & Sales Cost Production Overheads Distribution Cost

3.3. Percent Change in the Cost Components of Supply Chain (Y2-Y1/Y1)*100

3.3.1. Percentage Change in Marketing & Sales cost
This graph shows the change in the sales and marketing cost from year to year. It shows
sales and marketing cost for the year 2009 has increased about 20% more then the last
year.
1,600,000
24.00%
22.00%
1,400,000 20% 20.00%
1,200,000 18.00%
14% 16.00%
14.00%
Cost in 000 Rs

1,000,000
12.00%
800,000 8% 10.00%
8.00%
600,000 4% 6.00%
4.00%
400,000 2.00%
0.00%
200,000 -2.00%
-6% -4.00%
0 -6.00%
2004 2005 2006 2007 2008 2009

Marketing & Sales Cost % Change

Graph 4.5: Percentage change in Marketing and sales cost

The trend of increase in the marketing and sales cost is shown in graph represented in
graph 6 in appendix.

3.3.2. Percentage Change in Production Overhead Cost:

30
This graph shows the change in the production overhead cost from year to year. It shows
steady increase in the production overhead cost over the years since 2004.

3,000,000
0.24
0.22
2,500,000 20%
0.2
17% 0.18
2,000,000
0.16
13%
0.14
1,500,000 0.12
9% 0.1
1,000,000 0.08
5% 0.06
500,000 0.04
0.02
0 0
2004 2005 2006 2007 2008 2009

Production Overheads % Change

Graph 4.6: Percentage Change in Production Overhead Cost

The trend of increase in the production and overhead cost is represented in the graph 7,
appended in annexure.

3.3.3. Percentage Change in Distribution Cost

This graph shows the change in the distribution cost. It shows steady increase in the
distribution cost over the years since 2004. As we note in this graph that increase in the
distribution cost is more then the increase in the production volume.
For this purpose, the graph 8 in annexure can be referred in this connection.

31
 800,000
24%
700,000 20% 22%
19% 20%
600,000 18%
500,000 14% 16%
14%
400,000 12%
300,000 8% 10%
8%
200,000 5% 6%
4%
100,000
2%
0 0% 0%
2004 2005 2006 2007 2008

Distribution Cost % Change

Graph 4.7: Percentage change in Distribution Cost

3.4. Trends of cost of each Segment in the Supply Chain:
3.4.1. Trend of Marketing & Sales Cost
The graph is representing the trend of increase in the cost since 2004. The increase in the
marketing and sales cost is not as prominent as in the production and distribution cost.
Marketing &Sales Cost in ,000 Rs

1,600,000 1,503,693
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
Year 2004 Year 2005 Year 2006 Year 2007 Year 2008 Year 2009

Graph 4.9: Trend of Marketing & Sales Cost

This phenomenon is also represented in trend line in a graph 6 in annexure.
3.4.2. Trend of Production Overhead Cost
The graph is representing the trend of production overhead cost since year 2004. As it is
evident from the graph that production overheads are constantly increasing since then.

32
 3,000,000

2,500,000
Production OverHead Cost in ,000 Rs
2,433,653

2,000,000

1,500,000

1,000,000

500,000

0
Year 2004 Year 2005 Year 2006 Year 2007 Year 2008 Year 2009

Graph 4.10: Trend of Production Overhead cost.

The trend is represented by a trend line in the graph 7 shown in annexure.
3.4.3. Trend of Distribution Cost
The graph shown below represents the trend of distribution cost spanning over last
five years. It is evident from the graph that distribution network cost is on enormous
increase since 2004.
800,000
Distribution Cost in ,000 Rs

742,321
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
Year 2004 Year 2005 Year 2006 Year 2007 Year 2008 Year 2009

Graph 4.11: Trend of Distribution Cost

The trend of increase in the distribution network cost is represented by a straight
line in a graph represented in graph 8 in annexure.
3.4.4. Trend of Sourcing & Procurement Cost
The sourcing and Procurement cost has nearly exponential behavior after the 2006.

33
 14,000,000

12,000,000

10,000,000
Cost in ,000 Rs

8,000,000

6,000,000

4,000,000

2,000,000

0
Year 2004 Year 2005 Year 2006 Year 2007 Year 2008 Year 2009

The trend of increase in the sourcing and procurement cost is represented by a

exponential line in a graph 9 in annexure.
Graph 4.12: Trend of Sourcing and Procurement cost
14,000,000

12,000,000

10,000,000

8,000,000

6,000,000

4,000,000

2,000,000
Marketing & Sales Cost Production Overheads Distribution Cost
0 Sourcing and Procurement Cost
Year 2004 Year 2005 Year 2006 Year 2007 Year 2008 Year 2009

Graph 4.13: Comparison of cost of different sections

34
 3.4.5. Observations
 All costs like Marketing & Sales, Production overhead, Distribution and Sourcing,
Procurement are increasing as Production volume is increasing on every coming year.
 Trend of increase in Production Overhead Cost and Distribution Cost is nearly similar and is
Linear in nature.
 Trend of increase in Sourcing & Procurement Cost is nearly Polynomial in Nature.

3.5. Contribution of cost of each segment in total Supply Chain cost

3.5.1. Division of Supply Chain Cost

Supply Chain Cost - 2009

5%
9%

15%

72%

Supply Chain Cost - 2008

5%
10%

18%

67%

The remaining graphs have been represented in the annexure [9]

3.5.2. Trend of Contributions of different segments in Total Supply Chain Cost:

35
11
10
9
8
7
6
5
4
3
2
1
0
2004 2005 2006 2007 2008 2009

% Contribution of DC in SC Cost
% Contribution of Production Cost in SC Cost
% Contribution of Sales & Marketing Cost in SC Cost
% Contribution of Sourcing & Procurement Cost in SC Cost

3.5.3. Observations
 As the contribution of Production overhead cost increase/ decreases, the contribution
of distribution cost also follows same pattern.
 Ratio of Distribution Costs are approximately same as the Ratio of Production
overhead cost.
% % Contribution % Contribution of
Contribution % Contribution of Sales & Sourcing &
of DC in SC Ratio of Production Ratio Marketing Cost Ratio Procurement Cost Ratio
Year Cost (Y2/Y1) Cost in SC Cost (Y2/Y1) in SC Cost (Y2/Y1) in SC Cost (Y2/Y1)
2004 6  19  14  6.1 
2005 5 0.833 17 0.895 12 0.857 6.6 1.08
2006 6 1.200 18 1.059 13 1.083 6.3 0.95
2007 5 0.833 18 1.000 11 0.846 6.6 1.04
2008 5 1.000 18 1.000 10 0.909 6.7 1.01
2009 4 0.800 15 0.833 9 0.900 7.2 1.07
Table 4.2: Percentage contribution of each cost
 Contribution of Distribution Cost range from 6 % to 4 % of Total Supply Chain Cost,
from 2004 to 2009.
 Distribution Cost major fluctuates between 6 % to 5 % for 2004 to 2008 but in 2009,
they reduced it further from 5 % to 4 %.
 Production overhead cost fluctuate between 19% and 18 % for years 2004 to2008 but
in 2009 PTC further reduced it to 15 %. (18 % 2008-15 %2009)

36
 The contribution of Sourcing & Procurement Cost in Total Supply Chain Cost has
increased gradually from 6.1 % to 7.2 % for years 2004 to 2009.
3.6. Analysis of Distribution Network cost
3.6.1. Trend of Freight Cost
250,000

200,000

150,000

100,000

50,000

0 Freight Cost
Year 2004 Year 2005 Year 2006 Year 2007 Year 2008 Year 2009

Graph 4.13 Trend of Freight cost

3.6.1.1. Freight Cost w.r.t Production Volume\

This graph shows the relationship between production volume produced in a year
and freight cost occurred for transporting them to the distributors.
250,000 41 41 45

Production Volume in Billion sticks

37 40
35
200,000 35
31
Freight Cost (,000Rs)

27 30
150,000
25
20
100,000
15

50,000 10
5
0 0
Year 2004 Year 2005 Year 2006 Year 2007 Year 2008 Year 2009

Freight Cost Sticks

It is evident from the graph that freight cost increased during the last five years is
very consistent while increase in the production volume is not as much as increase
is in freight charges.
3.6.2. Trend of Rent of Warehouses

37
 The graph shows the trend of changes in the rents of warehouses over the last five years.
The graph shows a very rapid increase in the rents of the warehouses from 2004 onwards.

Rental of warehouses
Rental Warehouse Cost in 000 Rs

10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2004 2005 2006 2007 2008 2009

Rental of warehouses

3.6.3. Trend of Salaries, Wages & Benefits

400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

0
Year 2004 Year 2005 Year 2006 Year 2007 Year 2008 Year 2009

Freight Cost Rental of warehouses Salaries, wages and benefits Postage, telephone and stationery
Repairs and maintenance

3.7. Division of Distribution Network Cost

38
 Distribution Network Cost -2009
1% 0% 5%

10%
28%
4%
1%

1%

50%

Distribution Network Cost- 2008

1% 0% 5%

11%
29%
7%
1%

1%

45%

3.7.1. Observations:
 The contribution of Freight Cost in DNC increases from 24 % to 28 %, as volume
of Production increases from 27 Billion Sticks to 41 Billion Sticks.
 As the volume of Production increases from 27 Billion Sticks to 41 Billion Sticks,
the Rent of warehouse.

CHAPTER No. 5
Formulation of Problem Statement and Mathematical Model
39
INTRODUCTION
Two major topics have been presented in this chapter. First topic deals with the analysis of
previous history of cost data of different echelons of supply chain. This section emphasizes on
the importance and need of the project. Different data analysis and trend identification
techniques have been utilized effectively for meaningful interpretation of available data. While
second topic describes the way and methodology in which under examined problem was
resolved.
Therefore, the transportation schedule was proposed based upon the findings of model.
5.1. Problem Statement:
There are two Plants, twelve First Marketing warehouses, and 225 Distributors. Supply capacity
of each Plant is given and demand of each Distributor is given. Cost for transporting goods from
each Plant to each FMW is given; Cost of transporting goods from each FMW to Distributors is
given.

Fig. 5.1: Distribution Network Design

Typical question in the analysis of the network are;
 FMW are open or close
 Transportation schedule between Plants and FMW
 Transportation Schedule between FMW and Distributors.
40
It should be noted that every statement is applicable to every arc, complicating the network.
4.2. Available Data
4.2.1. Transportation Cost from each plant to each First Marketing Warehouse
The table shown below shows the transportation cost from Jhelum factory to each warehouse
across Pakistan. There are two different costs depending upon the type or size of the container
used for transporting goods from Jhelum factory to warehouses.
Cost of Transporting from Jhelum Factory to its First marketing Warehouses
          Transportation Cost  
    40 ft container 20 ft container  
  From Jhelum factory to Karachi FMW 49104    
  From Jhelum factory to hyderabad FMW 47099    
  From Jhelum factory to Sukkar FMW 36367    
  From Jhelum factory to Sahiwal FMW 26610    
  From Jhelum factory to Multan FMW 32766    
  From Jhelum factory to Bahawalpur FMW 34894    
  From Jhelum factory to Gujrawala FMW   8615  
  From Jhelum factory to Sargodha FMW   13948  
  From Jhelum factory to Islamabad FMW   10939  
  From Jhelum factory to Jhelum FMW   500  
  From Jhelum factory to Quetta FMW 65637    
  From Jhelum factory to Faislabad FMW   12853  
               
Table: 5.1: Transportation cost from JF plant to FMW
The table shown below presents the transportation cost associated for transporting goods from
Akora Khattak factory to each warehouse across Pakistan. The transportation cost fore each type
of container depends upon the size of the shipment.
Cost of Transporting from Akora Khattak Factory to its First marketing Warehouses
Transportation Cost 
  40 ft container 20 ft container
From Akora Khattak factory to Karachi FMW 55455  
From Akora Khattak factory to hyderabad FMW 53770  
From Akora Khattak factory to Sukkar FMW 44917  
From Akora Khattak factory to Sahiwal FMW 35480  
From Akora Khattak factory to Multan FMW 41050  
From Akora Khattak factory to Bahawalpur FMW 43161  
From Akora Khattak factory to Gujrawala FMW   19965
From Akora Khattak factory to Sargodha FMW   19473
From Akora Khattak factory to Islamabad FMW   8751

41
From Akora Khattak factory to Jhelum FMW   10939
From Akora Khattak factory to Quetta FMW 120956  
From Akora Khattak factory to Faislabad FMW   21878
Table: 5.2: Transportation cost from AK plant to FMW

4.2.2. Demand of each First Marketing Warehouse:

The table shown below provides the demand orders of each warehouse from Jhelum
factory. The demand is calculated on the basis of orders given by each warehouse. The
span of orders is spread over a year.

Table 5.3:
Demand of
FMW from JF
The table shown below provides the demand orders from each warehouse from Akora
Khattak factory. The demand is calculated on the basis of orders given by each
warehouse. The span of orders is spread over a year.

42
Table 5.4: Demand of FMW from JF

43
4.2.3. Supply capacity of each Plant:
Demand sent from AKF (Mln) Demand Sent from JF (Mln)
2264.40000000 1852.6910000
1585.08000000 1296.8840000
1585.08000000 1296.8840000
1358.64000000 1111.6150000
1132.20000000 926.3460000
1358.64000000 1111.6150000
1811.52000000 1482.1530000
1132.20000000 926.3460000
2943.72000000 2408.4980000
3170.16000000 2593.7670000
1132.20000000 926.3460000
3170.16000000 2593.7670000
22644.00000000 18526.9120000
Table 5.5: Supply capacity of each plant
4.2.4. Total Number of Sticks in a container
No of CBC in a 40 Ft truck   900   
No of Sticks in a CBC   100,000(10 M) 1M=10,000
Total Number of Sticks in a 40 ft CBC 900*100000 90,000,000  

No of CBC in a 20 Ft truck   440   

No of Sticks in a CBC   100,000(10 M) 1M=10,000
Total Number of Sticks in a 40 ft CBC 440*100000 44,000,000  
4.2.5. Transportation cost per stick per round

44
 4.3. Assumptions in formulation of Model:
 Warehouses have flexible capacities.
 Total volume of products shipped to Distributors does not exceed the
throughput capacity of the serving warehouse.
 Goods carrier is always available of required size.
 Transportation Cost is independent of TL or LTL.
 Warehouse can be engaged when required.
 There is no Miss match between Supply & Demand.

45
  Distribution Network holds true for a fixed period of time. i.e Freight Cost is
constant during the operation period.
4.4. Techniques used for formulation:
 Technique:
o Mathematical Programming
 Programming Language:
o Mixed Integer Linear Programming
4.5. Software or Tool used for formulation’s Solution:

 MS Excel Solver and Built in Formule

 MS Office Excel, Version 2007

4.6. WHY MATHEMATICAL PROGRAMMING??

Mathematical Programming

1. Provides exact transportation Schedule

along with minimum DC.

2. It tells which warehouse to Open and

Which to Close.

3. It Provides Minimum Distribution Cost

Precisely.

Cost Benefit Analysis

1. It can not tell Transportation Schedule.

2. It can only tell number of Distribution

Centers to Hold.

3. Minimum Distribution Cost is Based

upon approximations.

46
 4.7. Problem Formulation:
4.7.1. Parameter Definition:
I= denotes the number of plants (i= 1,2….n)
J= denotes the number of FMW (j= 1, 2, 3,……m)
Xi,j = Quantity supplied from Plant to FMW
Ci,j = Transportation Cost per stick per round from Plant to FMW
4.7.2. Decision variables:
Xi,j = Quantity supplied from Plant to FMW
4.7.3. Objective Function:
Z =∑ ∑ Ci , j X i, j ∀ i∈I , ∀ j ∈J
i j
i=n , j=m
Z= ∑ Ci , j X i , j
i, j

4.7.4. Constraints:
4.7.4.1. Supply Constraints:
j =m

∑ X 1 , j=18 , 526 , 912, 000

j=0

j =m

∑ X 2 , j=22 , 644 , 000 , 000

j=0

4.7.4.2. Demand Constraints:

i=n

∑ X i, j<¿ 4117091000
i=1 , j=1

i=n

∑ X i, j<¿ 2,881,964,000
i=1 , j=2

i=n

∑ X i, j ≤ 2,881,964,000
i=1 , j=3

i=n

∑ X i , j≤ 2,470,255,000
i=1 , j=4

i=n

∑ X i, j ≤ 2,058,546,000
i=1 , j=5

i=n

∑ X i, j ≤ 2,470,255,000
i=1 , j=6
47
 i=n

∑ X i, j ≤ 3,293,673,000
i=1 , j=7

i=n

∑ X i, j<¿ 2,058,546,000
i=1 , j=8

i=n

∑ X i, j<¿ 5,352,218,000
i=1 , j=9

i=n

∑ X i , j<¿ 5,763,927,000
i=1 , j=10

i=n

∑ X i , j< ¿ 2,058,546,000
i=1 , j=11

i=n

∑ X i , j<¿ 5,763,927,000
i=1 , j=12

4.7.4.3. Non Negativity Constraints:

Xi,j >= 0 for all I and j

4.8. Input data

4.9. Results

48
Savings due to model:
Primarily Logistics Cost before MILP Model = 145,084,692.00

Primary Logistics cost calculated by model = 165,878,482.00

Reduction in cost = 20,793,790.00

Percentage Reduction in Cost = 12 %

49
4.10. Validation of results Using MATLAB
This model was then implemented in the MATLAB in order to validate the results obtained
using MS Excel 2007. The code of the Model is present in the appendix. The window shown
below presents the code written in the MATLAB.

4.11. Results of MATLAB:

The picture shown below represents the results obtained from MATLAB;

50
These results matches with the results obtained from MS Excel.
4.12. Conclusion:

A comprehensive mathematical model has been presented in this paper that helps in determining
the number of distribution channels a company should have while minimizing the total
distribution cost. MS Excel 2007’s optimization box is used for solving the model, and at last
benefits of using linear programming have been stated as compared to simple cost benefit
approach for distribution network design.

4.13. Directions for Future Work:

In this paper we studied the earliest and most recent papers on distribution network or facility
location design within the supply chain and discussed the strategic planning of distribution
network.

51
We have concluded that though immense work has been done in this area but still some research
areas require extensive research work. Stochastic models of distribution network are one of
them. Very few papers addresses stochastic in multichannel distribution network design.

Very few papers dealt with the selection of transportation models in the distribution network and
the effect of different modes on network.

Moreover, there was hardly any paper discussing issue of carbon emissions on the distribution
network, and the strategy to reduce the green house emissions in the distribution segment of
supply chain.

Integration the reverse and forward distribution network is also one of the neglected areas of
research in distribution network.

At last there is plenty of room in improvement areas in the development of models for
distribution network considering different new ideas.

List of References:
[1] Supply Chain Management Best Practices by David Blanchard.

[2] The Handbook of Logistics and Distribution Management by Alan Rushton Phil Croucher
Peter Baker.

[3] Role of Connectivity in Growth Strategy of Pakistan by Ahmed Jamal Pirzada Planning
Commission, Government of Pakistan 2/28/2011.

[4] The World Bank report Chapter 13, Transport Sector

[5] Donald B. Rosenfield, “Design and control of Multi Echelon Distribution System” Working
paper Alfred P. Sloan School of Management, M.I.T, USA.

[6] Geoffrion, A. M.; Graves, G. W. “Multicommodity Distribution System Design by Benders

Decomposition”. Manage. Sci. 1974, 20, 822 844.

[7] C. H. Aikens, “Facility location models for distribution planning,” Eur.J. Oper. Res., vol. 22,
pp. 263–279, 1985.
52
[8] V. Verter and C. Dincer, “An integrated evaluation of location, capacity acquisition, and
technology selection for designing global manufacturing strategies,” Eur. J. Oper. Res., vol. 60,
pp. 1–18, 1992.

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